Why a company’s CEO could be a buy indicator for stock investors

Here’s a question: is a company only as strong as its CEO?

It’s an interesting concept because a firm can have a quality, one-of-a-kind product or service offering, but what is it worth if the CEO (or other senior figures on the board) consistently makes bad business decisions?

You can see why investors and stock traders keep a very close eye on the movements at the board level of companies they plan to invest in. When a strong CEO, with a track record of success, leaves a firm, it can be catastrophic to its performance and its share value – conversely, when a revered figure takes up a position on the board of a new business, it can act as a buy-in signal for traders.

It might not feature as the headline of any  trading tips  you may read, but it’s something you should be considering when adding to your portfolio.

Questions and answers

Here’s another question traders should ask when a CEO or senior exec leaves their position: why?

Stock valuations are all about confidence. Said confidence comes from knowing that a company is on solid ground as far as finances are concerned, but also behind-the-scenes too – are board meetings productive and effective, or are they a battleground for egos and bad blood?

Investors don’t require much persuading to pull their money out of a firm when the signs aren’t quite right, and that’s why the public performance of a CEO is so vital – they are supposed to be calm, reassuring, and positive that their firm is in rude health.

Any signs that they aren’t, and traders will hit that sell button and get out of their position. If a CEO leaves a company, investors must find out why – did they walk or were they pushed? If they resigned, why now?

Timing is key

Short-term traders can thrive in times of volatility, whereas long-term investors would much prefer steady growth from a period of serene calm.

Either way, the timeline after a new CEO takes up their role can be one of much uncertainty. If the former company head has left in acrimonious circumstances, the stock valuation of that firm is likely to enter a period of sustained instability. For a real-world example of this, which is purportedly fiction but hits the mark incredibly accurately, watch the  HBO drama Succession,  which focuses on the plots of three siblings to take over from their aging father as their firm’s de facto leader.

The job of the new CEO is to steady the ship and apply the brakes, saying the right things at the right time to appease shareholders and investors alike. For traders, timing their buy and sell orders will be crucial to their profitability in this time of uncertainty.

Not all CEO departures should be considered a negative thing. Some are divisive, unpopular figures, others have overseen several quarters of under-performance, and some simply retire or move on to a new role in a different sector.

In these instances, a new CEO or  senior figure can start with a clean slate  and improve investors’ confidence.

Insider trading

The role of the CEO in improving their firm’s share value goes beyond the decisions they make at the corporate level.

As we know, company directors are allowed to buy and sell a stock just like the rest of us, and their actions can go a long way to determining the next move of traders around the globe.

Typically, a CEO that sells off a chunk of their shareholding will not exactly herald a lot of positivity in their business. Why would they sell up? Is there bad news on the horizon? Do they know something we don’t? These are the sorts of questions that twitchy traders will ponder.

Of course, the decision to sell is not always linked to fear. Jeff Bezos, for example, has been selling portions of his Amazon shares for a good few years now, reinvesting in new areas such as his space travel outfit Blue Origin. That doesn’t mean that Amazon is struggling by any means.

But that’s a major global consideration. When John Schnatter, the founder of pizza chain Papa John’s, revealed in 2019 that he had sold a slice of his shareholding, the news spread like wildfire – their value plummeted 4% in a single day, wiping millions off his, and investors, fortunes.

The role of the CEO in maintaining stock market performance is crucial….and something that all traders should be wary of.

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